In a world inundated with terms like ‘alternate facts’ and ‘post truth’ we take comfort in numbers.

Our business is simple, you make money for your clients or you don’t. No amount of academic accreditations, algorithms or excuses can compensate for not making successful investment decisions (see ‘Long Term Capital Management’…).

The majority of our fixed income returns over the past number of years have come from Emerging Market bonds.

In the wake of Trump’s election victory, rising rate assumptions, a higher US dollar and a higher anticipated degree of trade protectionism led to a strong sell off in Emerging Market bonds. We took this sell-off as a buying opportunity.

Although mark to market pricing and wider bid-ask spreads can lead to higher volatility in Emerging Market bonds, we have found that choosing healthy companies in the right sectors can generate outstanding risk adjusted returns for long term investors.

Here are the two month returns for the Vanguard Total Bond Market ETF (the most popular bond ETF: BND US), the US 10 year note, and the German 10 year bund:

Now, these are not cataclysmic draw downs, but the effect on investor psychology can not be discounted. Bonds have had a wonderful 30 year run, and bond funds have seen massive inflows. But nothing lasts forever, and market movements can become self fulfilling prophecies, especially when it comes to crowded trades. Losing money on bonds is not something that this generation of investors are used to, and outflows from bond funds will lead to forced selling, which will lead to further pressure on bond prices, which will lead to further bond fund redemptions, which will lead to… I think you get the point.

Emerging market currencies, bonds, and stocks have sold off since the US elections as protectionist banter and hyperbole involving the implementation of trade tariffs has seen money flock to US assets and strengthened the US dollar. However, when the dollar is strong, foreign assets become cheaper, and shrewd investors will be wise to look at oversold EM assets in the next couple of months.

Here is a five year comparison of the S&P 500 Index -vs- the MSCI Emerging Market Index:

As you can see, Emerging Market stocks have massively under performed the S&P 500 Index and have actually lost money for investors whereas the S&P 500 has almost doubled over the same period of time.

My apologies for the lack of posts over the past two days. I was attending the Wealth Pro conference in Riga learning about tax domiciles, corporate structures, etc…

Glad to be back at the office.

I was recently talking with a client over Skype, who made the point that changes in sentiment can have a drastic effect on the price of securities. He was absolutely right.

However, there is ‘sentiment’ and then there’s ‘non-sense’.

Here’s a recent example:

The Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) invests in a portfolio of emerging market bonds that were issued in their local currency. Like regular mutual funds, the value of the holdings of a closed-end fund are calculated on a daily basis resulting in a net asset value (NAV). However, whereas the daily price of a mutual fund unit is based on its NAV, closed end funds are traded on the open market and are thus priced at whatever price the market bears. Usually, discounts to NAV in equity ETFs can be arbitraged away through high-frequency trading price arbitrage. However, this pricing efficiency is harder to replicate in the over-the-counter bond market – especially when dealing with more exotic bonds. Put simply, it is hard to replicate the holdings of EDD, so EDD has historically traded at a discount of its NAV. There is a functional logic to this fact. However, the degree of the discount to NAV can be quite striking.

I attended a number of panel discussions and seminars on the state of Emerging Markets at the JPMorgan Emerging Markets Corporate Bond conference last week.

I noticed two things in particular: (1) there did not seem to be all that many people in attendance, and (2) there were many South Americans.

Initially, it seemed strange to me that someone would fly 8 hours from Santiago, Chile to hear about their country’s corporate bonds (OK, fine, 4 days in Miami Beach is not a tough sell…). However, considering the brutal state of Emerging Market bonds and equities – especially Latin America – over the past year, it soon became obvious that many had made the trip to just clear their heads and get some group support.

Greetings from sunny South Beach! I spent the first part of this week attending JP Morgan’s High Yield and Leveraged Finance conference at the Loews Hotel. It turned out that JP Morgan was also hosting an Emerging Market Corporate Debt conference a block away, so I was able to jump from one conference to the other. Eight hours a day of presentations leads to massive information overload and I have a stack of presentations and analyst reports to go over when I get back to Riga, but both conferences were excellently executed and featured a broad array of presentations and divergent analyst sentiments. One term that seemed to sum up the zeitgeist was ‘constructively bearish’, but there were compelling arguments on both sides as to what will happen in high yield debt markets in the next year or so.